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The "Wright" Time for BMY?

08/05/2005 12:00 am EST


Kelley Wright

Managing Editor, Investment Quality Trends

Bristol-Myers has indeed seen its shares of market cycles. From a $5,000 investment made by William Bristol and John Myers, the company dates its history back to nearly the Civil War. Here, Kelley Wright looks at the firm's current place in history, and its future outlook.

"Bristol-Myers (BMY NYSE) first saw profits mushroom with the successful introduction of a mineral salt laxative and the first commercially available toothpaste to include a disinfectant. Since its founding, Bristol has added extensively to its business. Pharmaceuticals now represent 80% of the company’s net sales and is the major focus of operations worldwide. Though the company has numerous successful products, Plavix is its best selling, and used to protect against heart attacks. Pravachol is its second best selling. Product exclusivity rights for Plavix are not set to expire in the United Sates until 2011. Other pharmaceuticals include Taxol, sometimes used in ovarian cancer treatment and Paraplatin, used for ovarian cancer chemotherapy. Newer products include another cardiovascular medication named Avapro, a schizophrenia medication named Abilify, an HIV treatment called Reyataz, and a cancer pill named Erbitux.

"Nutritional operations are run by a BMY subsidiary known as Mead Johnson. During 2004, Mead Johnson’s activities represented 10% of total net sales. Mead’s products include a line of baby formula known as Enfamil. Nearly half of the company’s formula sales are eligible for WIC rebates, a government program to provide nutrition to infants and children of low income families. According to WIC, it serves 45% of all infants born in the United States. During February of 2004, the company sold its Adult Nutritional business to Novartis. This had primarily consisted of an adult nutritional beverage line called Boost.

"The company also operates ConvaTec, a manufacturer of wound and skin care products. Convatec also makes ostomy (as in colostomy) care and related products. BMY’s Medical Imaging operations were acquired through the purchase of DuPont pharmaceuticals in 2001. Consumer medicines include Excedrin, Bufferin, Comtrex, and Keri. The company also manufactures a line of diabetic care products launched in 2003, known as ChoiceDM. We note that the firm, a member of the S&P 500, has a market capitalization of $49 billion and approximately $6 billion in cash. The company has committed $115 million to support women and children affected by HIV in Africa.

"At a recent price of $25, Bristol-Myers is on the brink of being historically undervalued with 10% downside risk. From current levels the company has a 124% upside potential to an overvalued price of $56, where it would have a low yield of 2%. In the middle of June, the company settled with the government for $300 million over its fraudulent manipulation of sales and inventories. The development helps to place one of the biggest recent obstacles behind the company. Also part of the agreement is the replacement of the company’s current CEO in his position as chairman of the board, with former American Express executive James Robinson.

"Also of key importance to investors is a challenge to the patent for Plavix, which is currently licensed for sale from Sanofi-Aventis. This matter is expected to go to trial sometime before the end of the year, with a negative outcome placing a potential hit on future earnings. At current prices we feel much of the troubles BMY is facing is priced into shares, which trade at quite a discount to other pharmaceuticals of comparable quality. Though depressed earnings have raised our system’s preliminary 'Dividend in Danger' flag, we feel the company’s strong product line should safely support the dividend in the foreseeable future."

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